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International Securities Exchange

International Securities Exchange. March 2007.

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International Securities Exchange

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  1. International Securities Exchange March 2007

  2. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any options strategy. Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS. Copies have been provided for you today and may be obtained from your broker, one of the exchanges or The Options Clearing Corporation. A prospectus, which discusses the role of The Options Clearing Corporation, is also available, without charge, upon request at 1-888-OPTIONS or www.888options.com. Any strategies discussed, including examples using actual securities price data, are strictly for illustrative and educational purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities.

  3. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt CASH SETTLED ISE FX OptionsTM(Pending SEC approval) • The World’s Most Innovative Exchange • The World’s Most Dynamic Market • Designed For The Savvy Investor

  4. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt History of FX • The Bretton Woods Agreement was initiated in 1944 in an effort to keep cash from draining out of war-ravaged Europe. Currency movements were limited to 1% against the U.S. Dollar, which was fixed to the price of gold at 35 US Dollars an ounce. The modern era of foreign exchange first emerged in 1971 with the collapse of the Bretton Woods Agreement. The U.S. Dollar was no longer convertible into gold and market forces were free to adjust foreign exchange rates, signaling an increase in currency market volatility and trading opportunities. • The collapse in 1973 of the subsequent Smithsonian and European Joint Float agreements signaled the true beginning of the free-floating currency exchange system that drives the markets today. Starting in the 1980’s, computer technology extended the reach of the exchange marketplace. Today, the values of the major world currencies are independent of each other.

  5. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt More history of FX • 1978- Europe created the European Monetary System to reduce its dependence from the U.S. • 1992- George Soros and other investors outlasted the Bank of England and forced the currency into a “free float” • 1999- Europe launched the Euro currency to free float creating one of the largest traded currencies in the world

  6. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Fiat money • Refers to money that is not backed by reserves of another commodity • The money itself is given value by government fiat (Latin for "let it be done") or decree, enforcing legal tender laws, previously known as "forced tender", whereby debtors are legally relieved of the debt if they (offer to) pay it off in the government's money

  7. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Fiat money • Without anything backing a currency there is no restraint on credit growth, this can be both good and bad • Initially, a rapid growth in the availability of credit is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices • However, the economy may suffer periods of contraction as too much credit can lead to boom-bust cycles, inflation and possibly recessions

  8. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt What is a “Good” currency? • A currency that creates confidence • Retains value by maintaining purchasing power • Keeps intermediate and long term interest rates at a level that sustains economic growth because they factor in low expectations of future inflation

  9. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt What is FX? • Foreign Exchange is a currency market where the trading of one currency against another takes place. It is often referred to as Forex or FX. • The foreign exchange market is the largest most liquid and most influential market in the world

  10. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX Market • Daily Turnover Estimated At $1.9 Trillion • Primary Trading Centered Around New York, London and Tokyo Business Hours (Although trading is virtually continuous) • Market Dominated By OTC Futures And Forwards • Largest Turnover EUR, GBP And JPY

  11. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt What moves currency markets? • If a country's economic outlook improves, there will be a surge of interest and international investors will move money into the economy and thus drive up the value of its currency. Because of this, currency traders pay close attention to indicators that follow the health of an economy

  12. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt What moves currency markets? • Ultimately, it is supply and demand that determines a currency value

  13. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Factors to consider when looking at FX • Significant indicators that investors and traders watch include GDP, interest rates, international trade, and the unemployment rate • A country's political outlook will also affect how attractive it is to investors • Inflationary expectations and each country’s savings rate • The amount of debt relative to the amount of growth is also important for investors

  14. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Why Options? Why Bother? LongStock Short Stock Treasury Bill Without options, these are all of the available choices.

  15. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Why Options? Why Bother? Long Split-Strike Synthetic Long Call Short Call Long Put Short Put Long Straddle Short Straddle Long Strangle ShortStrangle Long CallSpread ShortCall Spread Long PutSpread Short Put Spread Ratio Call Spread Call VolatilitySpread Put VolatilitySpread With options, these are some of the available choices.

  16. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Why Trade FX options? • You can make a forecast on any of the SEC approved currency pairs and place the appropriate trade • If you feel the U.S. economy is strong and will strengthen and the U.K. economy is weak and will further weaken you can execute that forecast using ISE cash settled FX options • Unlike most markets where you buy something outright, FX you are always buying one currency and selling another (currency pair)

  17. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Features Of ISE FX Options • Options on exchange rates • U.S. dollar based • .50 strike prices • Premium quoted in U.S. dollars • European Exercise • Cash-settled • Noon Settlement/Option Friday • Noon Buying Rate FRB of NY (or an alternative source, the Reuters composite rate) • Available in Conventional Brokerage Account • Continuous Two-Sides Quotes • Trading Hours 9:30 – 4:15

  18. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Initial ISE FX Offerings • USD/EUR (ticker symbol, EUI):               74.18 (0.7418 x 100) • USD/GBP (ticker symbol, BPX):              50.43 (0.5043 x 100) • USD/JPY (ticker symbol, YUK)               119.55 (119.55 x 1) the rate modifier is 1 for JPY • USD/CAD (ticker symbol, CDD)              113.40 (1.1340 x 100)

  19. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Proposed ISE FX pairs (prices as of 3-22-07) • EUI- 74.18 U.S. Dollar/Euro • BPX- 50.43 U.S. Dollar/British Pound • YUK- 119.55 U.S. Dollar/Japanese Yen • CDD- 113.40 U.S. Dollar/Canadian Dollar

  20. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Currencies in Dollars over the years(Swiss Franc will be a future offering)

  21. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Currencies in U.S Dollars recently

  22. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Data vendors format • Using EUI

  23. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt And some of the future offerings… Australian Dollar New Zealand Dollar Swiss Franc Mexican Peso Swedish Krona

  24. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Proposed Future Offerings Euro/Yen Cross Rate Euro/Pound Cross Rate Euro/Franc Cross Rate

  25. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX News • News headline Bernanke boosts dollar, briefly (WSJ 4-12-07)- The dollar first climbed and then fell against the euro in a choppy session, but ended the session little changed from day-earlier numbers. Currency traders focused on the release of the minutes from the Federal Reserve’s last policy meeting March 20-21, which showed the Fed remains worried about inflation and that more rate increases “might prove necessary.” In response to the report, the dollar immediately jumped higher against the euro and reached a six-week high intraday high of 119.55 yen versus the Japanese currency. Higher interest rates generally tend to lift a currency as it increases returns for investors.

  26. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX News (YUK) • (WSJ) April 12 Meanwhile, Fed Chairman Bernanke also gave the dollar a short-lived boost during a speech at NYU when he downplayed the threat of China substantially reducing its holdings of U.S. assets. Some dollar bears have said that if a trade war were to develop between China and the U.S., the Chinese government-the world’s second largest holder of U.S Treasurys after Japan- may retaliate by selling a large chunk of its U.S holdings. This quite possibly could drive the dollar’s value down.

  27. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt YUK (USD/Yen)

  28. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX news (EUI) • (WSJ) April 12 The euro rose as expectations for a rate hike in May or June increased after the European Central Bank ended its April monetary policy meeting today. EUI meanwhile dropped to 74.18 as the euro strengthened against the U.S dollar.The ECB decided to leave key interest rates unchanged at 3.75% as expected. ECB Chairman Trichet said in the post-meeting press conference, interest rates were accommodative, suggesting the central bank may need to tighten monetary policy further. He said recent data showed the economic growth in the euro zone is stable.

  29. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt EUI (USD/Euro)

  30. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX News(CDD) April 13 (Reuters) - The Canadian dollar, hovering at 4-1/2 month highs against its U.S. counterpart, is benefiting from higher metals prices but remains within the range expected by the Bank of Canada, Governor David Dodge said on Friday. CDD traded at its lowest level since Nov. 29 at 113.40 "What we've seen is metals, food and energy prices a little stronger than we might have anticipated at the beginning of the year so the Canadian dollar has traded up a little bit over this period," Dodge said on the sidelines of the IMF/World Bank Spring meetings. "But it's traded roughly in the ranges that we had expected although a little bit higher. That seems to be largely reflecting the strength in metals and energy prices."

  31. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt CDD (USD/CD)

  32. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX news (BPX) U.K. Pound Posts Weekly Gain on Prospect of Two Rate Increases April 13 (Bloomberg) -- The U.K. pound advanced on the week against the dollar and yen as traders increased forecasts that the Bank of England will lift interest rates twice more this year. BPX traded at 50.43 today, BPX reached the lowest level since Feb. 27 earlier today The Bank of England has raised its benchmark rate three times since August, to 5.25 percent, to tame above-target inflation and cool the economy. .

  33. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt BPX (USD/Pound)

  34. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Product Margin • Volatility based – set quarterly • Minimum Margin 2% - 3% • Ask your brokerage representative more about the new ISE FX product and the suitability for you

  35. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Trading Direction • Structure Is U.S. Dollar Related If You Expect The Dollar To Weaken You Would Buy Puts If You Expect The Dollar To Strengthen You Would Buy Calls

  36. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt FX Options • Think of them as dollar FX index product Dollar Strong – Buy Calls Dollar Weak – Buy Puts

  37. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Option Pricing • To Price Any Option You Need: Price Of The Underlying Strike Price Cost Of Carry Time To Expiration Volatility

  38. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Option Pricing • FX Option Pricing Spot Price Strike Price U.S. Rate – Foreign Rate (Carry Calculation Could Be Negative - This is like a stock where the dividend exceeds the cost of borrowing) Time to expiration Volatility

  39. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Option Pricing • FX Options Volatility Is Lower Than Stocks, ETFs Or Stock Indexes Volatility Closer To What You Would Observe In Bonds Cross Rate Volatilities Are Often 50% Of The Individual Volatilities

  40. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Why has there been lower volatility recently in FX? • In recent history many of the major economies have not had major recessions • Central banks have implemented a more transparent monetary policy with a focus on price stability • More flexible exchange rate mechanisms leading to less currency surprises • Technology has improved allowing for an increased expertise in options pricing allowing for a better diffusion of currency risk among market participants • But, volatility may increase in the future due to some unforeseen events

  41. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Strategies • Same Core Trading/Hedging Strategies As Used In Stocks, ETFs and Indexes Option Buying For Directional Ideas Option Buying For Genuine Hedgers Credit Spreads For Income Spreads For Genuine Hedgers

  42. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Bearish on the Euro? (which means you are bullish on the dollar) • Euro at 77.82 You believe the dollar will strengthen against the Euro • One price forecast might be 83.33 • Remember, all the ISE FX option pairs are $ based • Dollar/Euro, further looking at the forecast: 1 Dollar/1.20 is .8333*100=83.33 • One strategy might be buying the 90 day $78 Call $1.15

  43. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt EURO (EUI) IDEAS $79.15 Long Dollar – Long $78 Call Buy 78 strike Call at $1.15 + 5 0 75 77.82 80 3 5 –

  44. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Volatility Play Euro Straddle • You expect a big move in the Euro • You are unsure in which direction it will occur • Buy a straddle Euro @ $77.82 Buy 78 Call $1.15 Buy 78 Put $1.40 Net Debit $2.55

  45. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Observation • Put premium may exceed call premium Why ?

  46. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Straddle + 3 0 74 76 78 80 82 3 –

  47. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Euro Bear Call Spread (Dollar bull spread) • Buy 90 Day 76 Call $2.30 • Sell 90 Day 80 Call $. 40 Net Debit $1.90 B E $77.90 Euro (EUI) 77.82

  48. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Euro Bull call spread (Dollar bear spread) • Sell 90 Day 76 Call $2.30 • Buy 90 Day 80 Call $0.40 Net Credit $1.90 Breakeven 77.90

  49. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Summary of ISE cash settled FX options • No underlying delivery concerns • Options are U.S. dollar relative and premiums are quoted in U.S. dollar terms • Trading instrument is intuitive due to being U.S dollar based, if you are bullish on the U.S dollar buy calls, if you are bearish buy puts • .50 strike prices • European style (no early exercise) • Noon settlement on expiration day at FRB of NY rate

  50. qqqq\Roadshow\ISE Secondary Roadshow Pres -2005 as of 11_23_05 v4.ppt Summary of ISE cash settled FX options • Exchange traded and regulated by SEC with all of the transparency that goes along with the securities markets • Available in conventional brokerage accounts • Similar to equity and index options, investors can select from the familiar option strategies to implement their own forecasts for various currency pairs (calls, puts or using spread strategies)

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